Chennai-based TVS Motor Co. Ltd is planning to increase its presence in the three-wheeler segment. Besides adding to its revenue, this should help the company expand its relatively low profit margins.

News reports indicate that TVS plans to introduce a diesel variant of its autorickshaw. Meanwhile, it has got its act together in the petrol, liquefied petroleum gas and compressed natural gas versions in the past one year.

TVS has a capacity to make 100,000 three-wheelers in a year and is expected to sell about 20,000 units in fiscal 2010, getting a 10% market share. “We find a good opportunity in this segment with relatively lower competition compared to the two-wheeler segment," says H.S. Goindi, president, marketing, TVS. “Given the poor public transport system in the country, the autorickshaw segment will grow at an average rate of 7-8% every year."

The company is expanding its reach in the three-wheeler market by tapping demand in semi-urban and rural areas as well. It is targeting a 20-25% share of the domestic market in the next 12-18 months, which will help it shore up profit margins. Analysts reckon that even two-wheeler giants such as Bajaj Auto Ltd get higher profit margins from three-wheelers.

“Domestic three-wheelers have above 20% profit margins," Umesh Karne, an analyst with Brics Securities Ltd, says in a report. Realizations in three-wheeler exports, a focus area for TVS, could also be a tad higher.

Two-wheelers, based on volumes and competition, have profit margins in the region of 12-15%. At present, operating profit margins (OPM) for TVS are relatively low compared with its industry peers. Bajaj Auto and Hero Honda Motors Ltd post an average OPM of around 16% whereas for TVS this is only about 5%. The reason for this could be poor volumes in motorcycles, what with stiff competition from leaders such as Hero Honda and Bajaj Auto, particularly in the 125cc segment, which is reckoned to constitute at least 40% of the total motorcycle market. TVS suffered a setback in sales on account of a legal tussle with Bajaj Auto over its product Flame. After being stymied pending the court ruling, the product has just been re-launched in the market.

Besides, the company hopes to post good volumes given two other new launches—TVS Jive and TVS Wego—in the 110cc segment. The above factors could help TVS post revenue growth of around 10% to Rs4,000 crore for 2009-10. Recently, the management had indicated that the company could sell about 1.6 million vehicles in the current fiscal. The strategy to grow contribution from three-wheelers will add to revenue and margins from fiscal 2011.

However, market leaders Hero Honda and Bajaj Auto command better market valuations as they hold nearly 80-85% of the motorcycle market, with a more diverse product profile. TVS shares trade at around Rs58, discounting analyst estimates of its earnings per share of around Rs4 for 2009-10 by around 15 times. That appears to price in its current market position, which could change if it can demonstrate the ability to drive sales growth and improve profitability.

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